March 16, 2022 – In our role as Financial Life Guides, we help our clients achieve their optimal life. Two objectives might inspire a person to seek the services of a Financial Guide:
1) They need help now, or recognize a need for a change to occur, but do not feel confident or qualified to get through the life transition alone.
2) They recognize the importance of money in achieving financial freedom, but do not feel confident or qualified to manage their wealth.
Being able to satisfy these objectives is less about segmentation and all about understanding motivation. As you could imagine, underlying client motivations are as unique as the individual seeking guidance. We find it meaningful to broadly identify our clients by their Life Motivation and Financial Motivation.
Last week, Part l of this essay outlined some of the Life motivations experienced by people who seek help with their finances.
In Part ll we will identify three different motivations clients have for the financial capital people possess when they contact us: 1) Accumulation, 2) Preservation, and 3) Aspiration.
ACCUMULATION: The definitive explanation of the accumulation stage is one’s working years, the period where you should be saving money for retirement. But times have changed, and the definition of “working years” and “retirement” may no longer be “Webster’s dictionary eligible.” We now see the “great resignation” where workers have ceased returning to work post-pandemic. We have seen the new “retire mentality” where people leave their current jobs only to lead a much more active life, including the possibility of earning with their passion. While it might be disappointing to the financial purists, I define the accumulation stage as starting at your first paycheck and ending when you no longer need one. When you no longer need a paycheck, you have reached what is known as Financial Freedom.
There are a few essential characteristics of the Accumulation stage. If you are early in the stage, it’s time to learn sound financial habits. Understanding the principles of saving, spending, insurance, and appropriate debt provide foundational instincts that serve a lifetime and compound at a rate way beyond the stock market. In the rapid accumulation phase, we must introduce the principles of investing, taking risks, estate planning, and minimizing tax, which is essential to growing your wealth. Probably the most crucial decision point in the accumulation stage is being clear on your goals and priorities and determining if your financial capital is enough. Some refer to this as “the number.” The number is easy enough to determine once you have become clear on “what is enough.”
PRESERVATION: The motivation to accumulate financial capital will, over time, become the motivation to preserve and protect it. Having become comfortable with the feeling of “financial freedom,” we become susceptible to our usual behavioral bias of loss aversion. You have reached the top of your mountain and do not want to descend. At this time, without the benefit of future earning years, acknowledging your priorities is the key ingredient to an informed decision. Comparing your wealth to the cost of achieving your goals will provide a sense of your “margin of error.” The wider the margin in effect, the less precise your decision framework needs to be.
Our approach with the clients in the Preservation stage addresses a set of impactful factors that are unique to the client. Our financial focus turns slightly away from the Net Worth statement and more to cash flow. Discussions about funding your lifestyle, gifting to children and charities, and making sure Uncle Sam gets as little as is legally possible make it to more than one agenda at client meetings.
The investment portfolio is undoubtedly a focus when financial capital is being accumulated. Longer time horizons allow for increased capacity for risk and, therefore, a chance for higher returns. Volatility in the markets is unpleasant but rationalized because there is time to “rebound.” The rules change when preservation is your motivation, and time becomes your tightest constraint. You are concerned that your time horizon is growing shorter, making the stock market volatility and a sequence of low or negative returns very concerning. At the same time, rising life expectancy statistics make “longevity” risk (or outliving your money) a real fear for many of our seniors.
At age 72, the current tax law mandates a “required minimum distribution” from your qualified retirement accounts. After many years of deferred tax benefit from retirement savings and compounded returns, it is now time for Uncle Sam to get his cut. It’s hard to believe that diligent savers who are also prudent spenders find themselves in higher tax brackets than when they earned a salary!
Reaching financial freedom is a beautiful experience for our clients and guiding them through this stage is very rewarding, but highly challenging.
ASPIRATION: Clients sometimes are in the fortunate position to allocate their most precious resources – time, money, and talent – in the pursuit of outcomes that provide benefit outside their circle of family and friends. They have come to terms with having more than enough money to support their personal needs and aspire to help others. They are personally fulfilled and drawn to a mission of filling a void in society that is meaningful to them. It broadens their legacy and their impact on the world and completes their sense of purpose.
While you likely would identify people in the Aspiration stage as the “super-rich” who oversee well-funded private foundations and have names like Gates, Buffet, or Bezos, they represent a minority of those who now want to “live their lives for others.” I’m sure you know who they are. It could be the retired doctor providing pro-bono medical care in needed communities worldwide or the handyman taking multiple “sabbaticals” to work with Habitat for Humanity. It’s the accomplished lawyer who works in social services, on behalf of people less fortunate or at-risk, rather than a prestigious law firm.
When Aspiration is a financial motivation for clients, we again must alter our approach to Financial Life Guidance. “Maslow’s Hierarchy of Needs” is a motivational theory in psychology, expanded in 1970, comprising an eight-tier model of human needs. The bottom level of the hierarchy is physiological needs (food and clothing) rising to transcendence needs, the highest level, which refers to people motivated by values that transcend themselves. We realize that while these needs are not as “rigid” as some theorists believe, we want to make sure that financial resources are appropriately allocated and prioritized across all requirements. We can assess this with clients because we are following their unique roadmap.
Clients have varying levels of charitable intent. By their generous nature, clients in the Aspiration stage provide us the opportunity to brainstorm how to maximize the financial impact of their philanthropy. Surprisingly, the IRS becomes an unwitting accomplice in our efforts. The US Tax Code provides a significant number of tax incentives to those willing to donate to charitable causes. Not surprisingly, the financial services industry and the legal profession have developed products and structures to take advantage of these incentives (for a fee, of course). We discuss impactful opportunities with our clients, such as donor-advised funds, charitable trusts, private foundations, and the outright exemption to income, gift, and estate tax.
To summarize, when people come to the realization that seeking help with their finances would be of value and in their best interests, they should consider engaging a financial guide that will partner with them to understand their individual Life and Financial motivations. Each client is unique, we are not a hammer, and not everyone is a nail!